Market Review | 12.01.2008

Weekly Results:

S&P 500 896.24 +19.11%

NASDAQ 1,535.57 +16.67%

Russell 2000 473.14 +22.80%

MSCI Emerging Markets 22.84 +19.58%

A Dose of Optimism:

Although, the current geopolitical climate appears unstable; global stock markets briefly rallied. In the past six months, a dose of optimism has resulted in costly returns. Perhaps, mean-reversion appears overdue but remains a tricky game. Interestingly, during market tops and bottoms, many have realized that holding positions for an extended period is too risky. Some pundits are placing their wagers for a market bottom in 2009.Opinions do vary across the spectrum in identifying optimal entry points.

How low can we go? Evidently, bears are not looking to aggressively bet against beaten up markets. Last week, short-covering was visible. Interestingly, stocks trading above their 50 day moving average improved to 19%. Also participants are contemplating if current performance is discounting worst case scenarios. When you put these factors together maybe the downside pressure is close to subsidizing. Simply, investors are realizing that reducing exposure and shorting time frame is required. Another key point to consider is the unusual market flow given liquidation and adjustments in the system.

Within a cycle breakdown its possible to see a temporary rally. For example, Financials and Homebuilders rose nearly 50+% last week . Overall recovery was fueled by bailout packages. For optimists, these issues showcase a glimpse of hope. A positive indication was seen in a sharp VIX (Volatility Index) decline. The index fell 31% for the week. Importantly, the announcement of economic team by the new administration provides some needed comfort. In the past few years, this part of year has been favorable for a market recovery. Clearly, this is a challenging atmosphere from various historical prospective. Therefore, grasping the near-term vs. long-term flow of markets is a critical part of decision making.

Not Yet ---Evidence needed

Generally, further downside moves seems to match broad expectations. Last week, Goldman cut its EPS estimate for S&P 500 to $55. Similarly, Citigroup reduced its index expectations to 850 from 1200. Finally, 3rd quarter expectations are much lower as well. Investors can be discouraged to participate based on psychologically. On the other hand, market bottoms take on a different shape that is not expected by most. Combining these factors set the stage for a confusing environment. In the week ahead, few earnings and non-farm payroll data can provide some clues or confirmation. Again, implementation of government relief programs is yet to be fully discovered.

"While Wall Street analysts are typically known for being overly optimistic, based on at least one measure, they have never been less bullish. According to Bloomberg statistics that track analyst buy, sell, and hold ratings, only 36% of all ratings are currently buys. This is the lowest level since at least 1997, and significantly lower than the 75% level we saw in 1997 and 2000. (Bespoke Investments – 11.25.2008)

The macro picture reminds us that distrust and a lack of confidence exists across equity and credit markets. This remains the essential factor to spark a positive momentum. At this point, participants are too skeptical and are willing to wait for upside confirmations.The wait and see game can be a difficult part of this process is. In fact, that's where trading can be dangerous and risking capital is less worthwhile. Eventually, odds are increasing for a pent up bullish run. Nonetheless, capital inflow is a prevailing theme that's difficult to ignore.

"Investors Pull Record $179.6 Billion from Equity Funds in Past Three Months" (TrimTabs – Nov 30, 2008)

MACRO LEVELS:

Crude: [$54.43] Attempting to bottom from November 21st lows of $48.25. Currently, its trading near 15 day moving average with negative weekly trend.

Gold [$814.59] Multi-week trend suggests an early signal of stabilization. Next key level on the upside is 873.62 which is the 200 day moving average. A pullback in US dollar and lower rates could influence a higher move in Gold.

US 10 Year Treasury [2.92%] Yields have dropped nearly 30% since October 15 2008. 2.20% is the lowest historical point reached in 1949.

DXY – US Dollar [88.46] After a strong 6 month performance, the currency is pausing its positive momentum. A peak on November 21 of 88.46 appear to have set the stage for pullbacks.

S&P 500 Index [896.24] Key trading range forming between 800-1000. Interestingly, the index broke below 2002 lows and rebounded from oversold conditions.

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any way, considered liable for the future investment performance of any securities or strategies discussed.

Market Update | Nov 24, 2008

Weekly Results:

S&P 500 800.03 -8.39% 

NASDAQ 1,384.35 -8.73% 

Russell 2000 406.54 -10.95% 

MSCI Emerging Markets 20.22 -10.71%

 

Bailouts and intervention are increasingly playing a major role. This weekend's bailout of Citigroup can create some near-term recovery.  Overall, confidence restoration is not fully visible among participants. Clearly, various asset classes are oversold but too short term oriented.

Calling bottoms and selecting stocks seems too risky for market participants. Again, these lessons keep repeating in a period of turbulence. Weekly declines partially describe the full story as the S&P is down 45% year-to-date. Credit fears and a worsening economy continue to paint and reinforce the current condition. Generally, market extremes are poised for mean-reversion. Despite, growing pessimism the market dislocation has yet to recover. From various perspective, investors have noticed that stocks are cheap. Interestingly, various headlines point out the historical magnitude of recent performance. Crude is below $50 and VIX is above 70. Perhaps, this relationship paints the picture of a new era. In addition, the S&P 500 broke below 2002 levels of 768. This serves as a key mark for cycle observers by confirming the downturn in this cycle correction.

"The lowering of the Fed funds rate, the Fed's innovative programs to provide liquidity to financial institutions and more lenient rules for borrowing through the discount window appear to have exhausted the gamut of possibilities routed through monetary policy changes to influence aggregate demand." Asha Bangalore (Northern Trust)

The fear in credit markets and de-leveraging processes are greatly impacting the dynamics of trading. For bargain hunters, select opportunities appear tempting on a historical basis. On the other hand, this is a difficult environment for long-term buyers. Stabilization is desperately required given increasing default risk and forced selling. In picking stocks, investors face multiple variables that create a difficult trading environment. That said, more patience is needed. Managing risk has become a  labor intensive process with undefined trends. Thus, mapping out a 3-6 month investing plan presents a very high risk/reward. Nonetheless, a furious recovery is possible given that the S&P 500 is 35% removed from its 200 day moving average.

Interesting Perspective:

"The dividend yield on the S&P 500 is now greater than the yield on the 10-year Treasury. That hasn't happened since 1958".(Barrons 11-24-2008)

Macro Levels:

Crude [ $49.93] : Downside momentum building after breaking below $60. Next significant range around $40, last reached in 2004. 

Gold [$774.50] Early signs of bottoming between $712-750 range. Again, the long-term trend does not showcase an entry point.

US 10 Year Yield [3.19%] Sharp drop-off resulting in a 54 basis points weekly decline.  US 10 Year Yield broke below several support levels and  reaching  5 ½ year lows.

DXY – US Dollar [88.19] Strength developing after established lows in mid March. Next support around 84.

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any way, considered liable for the future investment performance of any securities or strategies discussed.

Market Review | Nov 17, 2008

Weekly Results:

S&P 500 873.29 -6.20%
NASDAQ 1,516.85 -7.93%
Russell 2000 456.52 -9.74%
MSCI Emerging Markets 22.64 -7.13%

Overall investor anxiety has yet to settle especially with unknown policies ahead. This creates a challenging atmosphere for identifying long-term ideas. Interestingly, there is no shortage of headline materials at this stage of the consolidation phase. Key discussion points include reactions of G20 meetings, senate testimonies and implementations of existing bailouts. Most participants are watching events more than capturing sustainable trends. A rise of 18.20% in (VIX Volatility Index) partially tells the story of turbulent trading patterns.

Clearly, it's hard to deny established downtrend given the violent nature of market moves. Even pure fundamentalist are leaning towards technicals for some answers. Unfortunately, markets appear too correlated and are moving in a similar direction. Much attention is being paid to fallout results more than to promising outlooks. Although, some trading days remind us that expecting mean reversion can be misleading. That's serves as an ongoing lesson of this historical cycle peak. Simply, this dislocation of a non-trending and fear driven markets make new extremes appear like the norm. This is reflected across various asset classes ranging from Commodities to Real Estate. At this point, not many places to hide given risk aversion among most investors.. For example, money market funds have risen by 20.3% year-to-date.

Corporate liquidity is awful. Announced corporate buying was below $6 billion in each of the past seven weeks even though the S&P 500 plunged 24.6% in this seven-week period. Also, insider buying in the past two months totaled $3.4 billion, down 24% from $4.5 billion in the same period last year. The best-informed market participants are signaling that stock prices have further to fall. (Trim Tabs – November 17, 2008).

In this deleveraging phase, it takes time to restore confidence and accept new emerging themes. For optimist, making long bets has been costly since entry points. Similarly, rotational opportunities into other sectors are not quite clear. Simply, more patience is required to find attractive entry points.

MACRO LEVELS:

Crude [$57.04] Recovering from annual lows of $54.67. Oversold in the near-term, but downtrend established as defined by a break below $80.

Gold [$747.50] Several weeks of consolidation between $720-760 ranges. No signs of trend reversal, as the commodity peaked in March ($1011) and failed to make new highs in July 2008.

US 10 Year Yields [ 3.73%] Over two month of uptrend intact. A key support level developing around 3.65%.

DXY – US Dollar [86.36] New multi-year highs reached again this week at 88.14. This reinforces positive momentum from March lows for the index.

S&P 500 [873.29] Early signs of stabilization, as charts demonstrate a new range within 800-1000. Much attention will be focused on November 13th lows of 818.69. Interestingly, S&P 500 is few points away from previous cycle lows of 768.63 in 2002.
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The positions and strategies discussed on MarketTakers are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any way, considered liable for the future investment performance of any securities or strategies discussed.

Market Thoughts - November 11, 2008

Weekly Results:

S&P 500 930.99 -3.90%
DJIA 8,943.81 -4.1%
NASDAQ 1,647.40 -4.27%
Russell 2000 505.79 -5.90%
MSCI Emerging Markets 24.38 -2.84%

A historical year given election results, credit collapse and increasing global interventions. At this junction, there is a convergence between the business and political cycle.

In terms of the business cycle, contraction and deleveraging are th domeinant subjects. Of course, economic declines are becoming the norm as most readjust expectations. Last week, additional data points from Institute for Supply Chain Management and Non-Farm payroll confirmed the cycle downturn. A new political environment shapes the long-term outlook, mainly based on budget spending and job creation. On the other hand, investors continue to speculate on emergence of new sector and cycles. Now, this transition in leadership creates a challenging trading arena. Especially, with near-term turbulence for those betting on themes. In due time, increased intra-day swings should stabilize. At this point it is too early to call.

In looking ahead, the cycle fallout has expanded from intervention to collaboration. Perhaps, G20 meetings can restore some confidence. In some cases, markets have priced in worst case scenarios. Similarly, Fed Funds futures imply a 97% chance of 50 bps rate cut for December 16th. That said, inflow among equity funds increase by $2,186 million last week, which showcases some signs of optimism (Trimtabs).

There are two key components of long-term equity returns: dividend (or profits) growth and valuation changes. In the second half of the 20th century, equity returns were given an enormous boost by higher valuations. In the past eight years, they have taken a savage hit, despite the growth in economic output and corporate profits, as valuations have returned to normal. (The Economist –November 6, 2008)

The next few months might not provide clear trends as desired by most investors. Through these macro inflection points, equity managers are reshuffling portfolio's. Recent behaviors also remind investors the importance of cutting losses. The lack of clarity lead to turbulence and disruption of flow. Again, VIX is forming a new trading range above 50. In fact, the combination of near-term uncertainty and bargain hunting create a puzzle. Analysts will most likely lower their earnings expectations and an additional downside move can provide optimal entry points.

The past few years Technology, Media Telecom and Healthcare have been neglected sectors and are poised to lead on a relative basis.

Stock Specific Ideas:

Healthcare:
KG (King Pharma), TECH (Techne), BLUD (Immucor) and GENZ (Genzyme)

Technology:
ORCL (Oracle), ATVI (Activision) and CREE (Cree Inc)

Macro Indicators:

Crude [$61.04] Holding slightly above yearly lows of $59.97. Major support around $60, which marked a key level in 2007.

Gold [$735.25] Established downtrend since mid spring highs. Attempting to bottom with $700 serving as a support level.

US 10 Year Yield [3.79%] Early indication of an uptrend in yields. Since, September 16th yields have jumped from 3.24% to 3.79%.

US Dollar –DXY [85.90] Multi-month momentum remains positive as confirmed by upside move from $76 to $85.

S&P 500 [930.99] New range developing between 839-100. Overall, volume has declined since October. Nonetheless, heavy resistance around 1000.

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any way, considered liable for the future investment performance of any securities or strategies discussed.

Market Review - November 3, 2008

Weekly Results:

S&P 500 968.75 +10.49%
NASDAQ 1,720.95 +10.88%
Russell 2000 537.52 +14.09%
MSCI Emerging Markets 25.09 +24.11%

Big Picture:

As oddmakers begin to speculate on election results, the overall market conditions appear equally puzzling. Clearly, election results will shape policies and longer-term trends. That said, this cycle correction is ongoing and requires additional time. Similarly, one can expect a short-term market reaction in markets. Generally, knee- jerk trading responses do not necessarily indicate overall multi-year trend. Meanwhile, impact of interventions and search of bottoms heighten the degree of 'unknowns'. In addition to the election, further earnings and economic data can provide additional clues to "jittery" markets.

Seasonal/ Cycle Factors:

As we enter November, increase in market volatility, worsening economic conditions and beaten-up stock market are clearly evident. Outside of political landscape, the cycle outlook suggests favorable atmosphere for sectors related to healthcare and technology. Unfortunately, as the downtrend continues, investors are forced to closely monitor entry and exit points. Recent weeks, have seen major shifts towards extreme negative sentiment. The current environment continues to witness large swings and lack of longer-term commitment. Historically, this October was the 8th worst monthly performance for the S&P 500 (-16%). Interestingly, the last three months of the year have produced positive returns. From a macro viewpoint, we are entering an era of de-leveraging. This adjustment process is yet to be resolved in financial systems.

Portfolio/ Trading:

Given steep declines, several pundits have pointed out available bargains in equity markets. In fact, as risk appetite eventually increases there are opportunities to accumulate quality stocks. In addition, mean-reversion trades seem highly probable but require short-term management. Generally, investor fear creates panic and overselling. Timing the market is the ultimate challenge, but valuations signal a buy point. Nonetheless, restoring natural flow of markets and stabilization in credit markets are desperately needed.

In a market that has become undervalued, however, the strategy of waiting for a measurable improvement in market action historically has not performed nearly as well as a strategy of gradually increasing market exposure, on declines, as the market's valuation improves. Scaling in that way is certainly not comfortable, but the willingness to experience short-term discomfort is a scarce and ultimately well-compensated resource on Wall Street. The key is to scale gradually and in proportion to the expected return profile, rather than trying to "time" reversals that can't be predicted. (John P. Hussman - Risk Management and Hooke's Law - October 27, 2008)

Investment Ideas: Innovative related themes present select buying opportunities. Improving fundamentals and relative strength bode well for upcoming bullish cycle.

Healthcare:

GENZ (Genzyme), BLUD (Immucor), STE (Steris) and TECH (Techne)

Technology:

ORCL (Oracle), COMS (3Com) FORM (Formfactor Inc) and EMC (EMC Corp)

Macro Levels:

Crude: [$67.81] :Reverting back to 2007 levels, with next major support around $50. Specifically, Crude reached similar low on January 17^th 2007 of $49.90.

Gold [730.35]: Attempting to bottom near $700. Established downtrend since March 2008 highs. This October marked annual lows of $712.50 as the commodity declined over 25% since mid-July.

US 10 Year Yield [3.96%]: Trading at a narrow range between 3.80-4%. Yields have risen 22% since September 16^th lows .

DXY- US Dollar [85.63] : Recovering and holding above a key level of $84.

S&P 500 [968.75]: Consolidating between 850-1000. Early hints of stabilization after sharp declines.

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any way, considered liable for the futurinvestment performance of any securities or strategies discussed.

Market Thoughts - October 27, 2008

Weekly Results:

S&P 500 876.77 -6.78%
DJIA 8,378.95 -5.35%
NASDAQ 1,552.03 -9.31%
Russell 2000 471.12 -10.51%
MSCI Emerging Markets 20.22 -16.73%

Following the bursting of bubbles, it is normal to evaluate the causes of peaks and assign blame. Given various mainstream topics, it is clear headlines contain political and regulatory flavor. Simply, plenty of noise out there with rear-view examinations of an already peaked market. Similarly, it is becoming hard to avoid the frantic discussions of "Gloom & Doom" scenarios. Recently, emotional market responses seem to be the norm; this clarifies new extremes in volatility and sentiment readings. Last summer/fall set the tone for a major cycle shift. The origins of a visible credit crisis and peak in emerging markets served as early clues. The results of that "shift" are taking ugly turns with less predictable behaviors. Overall, there is a growing acknowledgement that this unraveling process was inevitable. Perhaps, this is an early step towards the confidence restoration process.

Market peaks come as more of a "shock"than a smooth trend. Many are forced to adjust to new emerging realities. For example, Crude is below $80, S&P is at a 5 1/2 year low, economic deceleration continues and the dollar has emerged . At the same time, contraction in Financial Services is an ongoing theme.

Assets managed by hedge funds may shrink to $1.3 trillion within six months from about $1.7 trillion as investors withdraw their money amid declining returns, according to Credit Suisse Tremont Index LLC. "Institutional investors are monitoring their portfolios very closely, and we expect to see continued redemptions," Oliver Schupp, president of NY-based Credit Suisse Index Co., said, "there will be a high degree of closures with many small funds pushed out." Investors withdrew a record $43 billion from hedge funds last month, stated TrimTabs Investment Research.

Money Management/ Trading:

Those relying on correlation and mean-reversion are struggling to dissect the current environment. It is understandable, that bottoms and tops are hard to time and indentify. Nonetheless, the market continues to tempt optimist and eager investors. In addition, pundits and veteran participants have pointed out that bargains are available. Interestingly, picking stock specific ideas has a shorter-term emphasis. Again, disruption in natural market flow can increase overall risk exposure.

"The removal of liquidity and deleveraging that's taken place around the world has caused tremendous dislocation in the price of those cash assets relative to the value of the underlying derivative hedges." (MarketWatch Oct. 24, 2008)

Macro Levels:

Crude [$64.15]: Holding above intra-day lows of $62. Nonetheless, an established downtrend as the commodity failed to rally. Following an usual rally on September 22, Crude has fallen by nearly 50%. Basically, it remains in a correction phase between $60-80.

Gold [712.50]: Down 27%+ since July 15th. Interestingly, Gold has not witnessed price appreciation in an environment of risk-aversion. Approaching 700 level, last visited a year ago (fall 2007) and served as a breakout level.

US 10 Year Yield [3.68%]: Normalizing around 3.60% in the last 2 months. Major support near 3.50%. In the short-term, signs of stability after mid-September 2008 lows.

US Dollar –DXY [86.44] : After forming a base between March and July, the currency index has broken out. Now, overbought and poised for minor corrections.

S&P 500 [876.77] : Staying above October 10 lows of 839.80. A short-term trading range forming between $750-900.

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any way, considered liable for the futurinvestment performance of any securities or strategies discussed.

Market View - October 20,2008

Weekly Results:

S&P 500 940.55 +4.60% 
NASDAQ 1,711.29 +3.75% 
Russell 2000 526.43 +.76% 
MSCI Emerging Markets 24.28 -1.53%

Markets attempt to restore natural trading flow after several weeks of disruptions and intervention. In the current readjustment period, investors struggle to look ahead given a lack of stability. Recently, the emotionally driven reactions have required near-term risk management due to high volatility. Of course, with pending elections and regulation reform, a new trend is yet to be defined. In this upcoming week, earnings can provide further company specific clarity. Also, economic data presents further examination on the condition of this cycle slowdown. As for the opportunists, stocks appear cheap and seasonally the fourth quarter offers a glimpse of hope. Nonetheless, more conviction and confidence is needed in the overall Financial system.

With the S&P 500 down 35% year–to–date, most valuations suggest a buy point especially given new October lows. "Almost $50 billion of that outflow came in the first 10 days of October"  (TrimTabs). This extreme outflow away from stocks continues to be a significant trend. Similarly, money managers are reshuffling portfolio's following a weak third quarter. Therefore, the mechanical part of the market can signal unusual behaviors. Similarly, risk-aversion is a dominant theme this year, as investors rotated to money markets. So far this year,  money markets have expanded by 16.5% or $405 billion (according to Invesco). On a similar note, EEM (Emerging Market Fund) is down nearly 60% in the past year. Again, lack of willingness to take risk is a reflection of investor panic. Following policymakers moves, investors will reassess their risk tolerance. In addition, Federal Reserve capital should slowly take effect. Meanwhile, credit crisis are not fully complete, but more patience is required.

Money Management:

Value seekers view pending declines as a buying opportunity. For example, the BKX (Bank Index) held above its annual lows of 46.52 set on July 15, 2008. Perhaps, this can indicate some bottoming process ahead. Technology and Healthcare offer few ideas given high odds of a mean-reversion rally.  For the most part, managing entry points on a near-term basis is vital for months ahead. A few long ideas below.

Stock Specific Ideas:

Healthcare: ABT (Abbott Labs), GENZ (Genzyme),BLUD (Immucor) and TECH (Techne)

Technology: ATML (Atmel), FORM (Formfactor), ORCL (Oracle) and ATVI (Activision Blizzard).

Staples: WMT (WalMart) and HSY (Hershey Co)

KEY MACRO LEVELS:

Crude [$71.81]:Developing a new range between $68-80. After a 50% decline since summer highs, the commodity is nearing oversold levels. Interestingly, the long-term trend is positive above $60.

Gold [784.50]: Attempting to shake off declines since March 2008. Near-term declines visible with Gold trading below its 50 day moving average of $833.55

US 10 Year Yield [3.92%] : Trading closer to the higher end of 2008 range between 3.40-4%. Next resistance level is at annual highs of 4.27%.

US Dollar DXY [82.41]: Early signs of a recovery from multi-year declines. Since March 1985 the currency index has declined significantly. The current uptrend is driven by a 17% rise from all time lows reached in March 2008.

S&P 500 [940.55]: Potentially forming a range between $900-1000. From August 11 to October 10 the S&P 500 dropped 31%, and these sharp declines take time to unwind.

 

Market Thoughts - 10-13-2008

Weekly Results:

S&P 500 899.22 -18.20%

NASDAQ 1,649.51 -15.30%

Russell 2000 522.48 -15.65%

MSCI Emerging Markets 24.66 -21.2%

Powerful weekly moves as investors digest the high magnitude of intra-day swings. Participants await impact of global interventions and pending confidence restoration.

Sentiment/ Reactions:

Its commonly known that trading on emotions leads to overreaction and enhances overall investment risk. At this point, sentiment gauges boldly illustrate extreme panic. The VIX (Volatility Index) spiked 54% on the week and reflects less rational reactions. Through this inevitable consolidation phase, the results of "negative headlines" have worsened. Not to mention, weak economic data and Financial systems have yet to stabilize. Thus, a reminder that calling "bottoms" is a dangerous process. In the past year, several indicators have numerously signaled overextension and contraction. Following the multi-year bullish run, we've approached an era of de-leveraging. This process is visible in the chart of NYSE Margin Debt which has been contracting since July 2007.

"Unwinding of margin has accelerated this week, and when that happens, prices fall as fast as positions are being unwound to meet margin calls. Those who invest using extremely high leverage are speculators, and these kind of market conditions end up squeezing speculators out of the market." –(Marty Chenard -StockTiming.com)

Cycles & Perspective:

In this current period, risk is unclear and requires reassessment. Meanwhile, participants wrestle to identifying entry and exit points. Nonetheless, general principals of human trading patterns repeat themselves in various cycles. This wave of panic selling is a powerful force to outsmart. The lows of 2002 might serve as gauge or support level. Then, the S&P 500 hit a low point of 768 , which sparked a new cycle upside move. Perhaps, declining below those lows is necessary to flush out multi-year gains from 2002-2007. Important to note, that markets have tendency to exaggerate. That said, even for the most optimistic, its difficult to overlook downside surprises. On the other hand, few await for natural exhaustion of sellers and increasing confidence among major participants. At this point, the disruption of natural market flows increases the number of unknown variables. Nonetheless, investors can cut their losses and exploit extremes for next cycle recovery. In other words, these are two behaviors investors can control.

Market Mechanics:

The mechanics of asset management suggest that selling pressure is not fully complete. For one thing, fund redemption lead to further downside pressure. In addition, liquidation by hedge funds is an ongoing trend. For example, "About 350 funds were liquidated in the first half of the year and if the trend continues, the number of closures would be up 24 percent this year from 2007" (Perpetual Interests, LLCTM). The current environment of "forced selling" and limited leverage continues to contribute to a readjustment process. That said, one can expect frantic market behavior. Thus, it becomes important to stay in liquid assets and manage portfolio's on a near-term basis.

Money Management:

Few points to consider:

· Additional patience is required for those seeking to buy as stocks decline/stabilize.

· The natural flow of markets is still disrupted.

· Many Technical indicators signal oversold readings, but sustainability is unclear.

· Volatility can breed opportunity, but requires intensive short-term risk management.

· Sole reliance on traditional valuations might not provide an accurate measure in cycle downturns.

· Investor psychology cannot be underestimated in which fear plays a major role.

Macro Levels:

Crude [$77.70]: Broke below a major support level of $80. Crude is down, over 47% since mid summer peak. In the near-term oversold and poised for a minor rally. Nonetheless, heavy resistance around $90.

Gold [$900.50]: Since September lows of $740, the commodity has jumped nearly 22%. Long-term trend is positive despite March 2008 peak at $1011. At this point, a break above $950 can confirm the strength of multi-week move.

US Dollar – DXY [82.99]: Yet another explosive move last week. Again, since March 17^th lows, the index witnessed technical improvement following several years of downtrend. In the near-term, the Dollar Index is extended as global investors piled on for risk-aversion. Despite sharp run up this year, the Dollar is few points removed from its 17 year moving average of 93.45.

US 10 Year Yield [ 3.87%] Trading in a narrow range between 3.60%-3.80% range. Attempting to stabilize, while hovering at the lower end of a 6 year range (3.50%-5.00%).

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any way, considered liable for the future investment performance of any securities or strategies discussed.

Market Thoughts | October 6, 2008

Market Thoughts | October 6, 2008

S&P 500 1099.23 -9.4%

NASDAQ 1947.39 -10.8%

Russell 2000 619.40 -12.1%

Emerging Markets 30.72 -15%

Sell-offs across the board despite politically driven announcements. Investor psychology is greatly consumed with "Fear". At this stage, there is an increasing fixation with indicators showcasing panic such as VIX (Volatility Index) and TED Spread. Clearly, both signal extreme bearish readings. Negative sentiment is understandable at this junction of this cycle. The weak economic and credit environment confirm this downtrend. Even the most optimistic investors, recognize that we are in a period of readjustment. A decline in (ISM) manufacturing index further reflects contraction in economic sectors.

As we begin the fourth quarter, commodities remain in a downtrend, labor markets seem vulnerable, and earnings can provide more clarity in investors' expectations. That said, bottom seekers are looking for a confirmation as odds increase for a sharp trading bounce. As for the longer-term outlook, more clues are desperately needed. Investors are confused, especially given recent disruption of market flow. In other words, the undefined regulatory landscape and pending elections force many participants to stay on the sidelines. In looking ahead, discussions of a Federal Reserve rate cuts should spark further discussions.

In March 2000, the S&P 500 topped at 1552. Similarly, last October the index peaked at 1576, just few points away from tech-bubble highs. Charts remind us, how the S&P 500 reached lows of 768 in October 2002 before a multi-year rally. Today, the index is 331 points removed from those market lows. In other words, there is room for further downside based on historical pattern. This decade's worth of run up in Credit, China and Crude is pulling back from excess levels.

Reconstruction in Financials continues to reshuffle ones valuations and expectations. Since the first short-sale ban in July, Large Cap financials have made a strong recovery. For example, XLF (Financial SPDR) has held above its annual lows of July 15^th. Sector consolidations appears to favor Super Regional Banks. For example, JP Morgan (JPM), WFC (Wells Fargo) PNC (PNC Financials) and USB (US Bank) are trading near yearly highs.

Macro Indicators:

Crude [$93.88] Holding above annual lows of $90.80. Downtrend intact from mid-summer highs. Despite, near-term trading recovery technical outlook remains negative.

Gold [828] Following a sharp recovery in recent weeks, index failed at $900. Although, a flight to quality in the current crisis, there is less upside momentum at current levels. Visible consolidation between $800-550.

US 10 Year Yield [3.60%] Sideways pattern forming between 3.60-3.80%. So far this year, yields held above 3 key lows (Jan 25 -3.28%, March 21 3.30% and Sep 19- 3.24%). Perhaps, this signals potential rise in yields from a technical basis.

DXY – US Dollar [80.31] Strengthening momentum since March 2008 lows. Extended in the near-term. Early signs of a breakout with further evidence needed. Potential pullbacks around 50 day moving average of $76.

Stock Specific:

Financials: Long: BX (BlackStone Group) | Sell: COF (Capital One)

Commodity Related Shorts : TS (Tenaris SA): STLD (Steel Dynamics), SID (Companhia Siderurgica) and GGB (Gerdau S.A)

Healthcare: BLUD (Immucor), GENZ (Genzyme) and ILMN (Illumina Inc), and TECH (Techne)

Other Long Ideas: WMT (Wal-Mart), LUV (Southwest Airline) and WTR (Aqua America).

Market Update – September 29, 2008

Weekly Results:

S&P 500 1,213.27 -3.33%
NASDAQ 2,183.34 -3.98%
Russell 2000 704.79 -6.49%
MSCI Emerging Markets 35.49 -2.21%

Awkward times indeed!

Clearly, a bizarre period when investors eagerly awaited results of government decisions. Basically, policymakers continue to play a major role in market reaction.

Market tampering, increasing headline materials and political posturing contribute to edgy markets. For the most part, the last 18 months have demonstrated slower growth, decreasing investor confidence and a cycle peak. We've reached a point where panic and risk-aversion are dominant market themes. During an election year, political rifts can disrupt the general flow of markets, especially with changing regulations. In addition, restructuring of the financial sector seemed inevitable given the fundamental weakness. This unresolved matter greatly contributes to key investors sitting on the sidelines as risk-aversion. One can expect more unusual trading given the approaching religious holiday and quarter-end. Also, an eventful economic calendar this week, where many await for clues on the condition of labor markets.

Reaching stabilization remains unclear from a regulatory and policy viewpoint. Some argue that the natural process of a global slowdown is a force that corrects itself naturally. Taking a step back, participants are reminded that a year ago emerging markets peaked after a sharp upside moves. EEM (Emerging Markets Fund) is down 56% since last fall's peak. A reflection of retracement from overvalued themes related to Credit, Crude and China. Therefore, previous relationships and expectations have entered a readjustment period. This leaves few sectors attractive in terms of rotational beneficiaries. In other words, there are few ideas for those willing to chase positive momentum. That perhaps, explains the results of excess capital in the marketplace. Now, further decline in Financials can appeal to value buyers. Trust and confidence restoration is a pivotal step in reaching market bottoms. The Federal Reserve continues to inject liquidity into the system and for the most part has yet to create a bottom.

"Discount window borrowing (also known as primary credit to banks) increased $20.4 billion between September 3, 2008 and September 24, 2008). Funding through the Primary Dealer Credit Facility was up sharply during the past two weeks amounting to $105 billion." Paul L. Kasriel – Northern Trust.

Financials:

In one sense, this month has featured an unprecedented failure of financials. On the other hand, indexes have reached extreme bearish levels. This sets the stage for the next cycle. Perhaps, larger Banks are poised to benefit from a fundamental view. Interestingly, XLF( Amex Financials Index) has stayed above its annual lows. In fact, a sharp rally since July 15^th lows which serves as a technical barometer. Given the volatile landscape, overall trend is too speculative especially given early headline reactions and pending mergers. Again, investor psychology should determine investor sentiment as managers reassess overall risk.

In terms of the credit crisis and intervention – here is one view.

"Instability is not necessarily harmful; indeed, if it were described as dynamic adjustment, it would sound positively benign. But carried to extremes, it can give rise to sudden reversals that may take on catastrophic proportions. That is particularly the case where credit is involved, because the liquidation of collateral can lead to sudden compression of market prices. The prevention of excessive instability is therefore a necessary condition for the smooth functioning of the market mechanism." George Soros -"The Alchemy of Finance (1987).

KEY MACRO LEVELS:

Crude [ $106.89] :Remains in a downtrend from its summer peak. Attempting to hold around $104-106 and below its 200 day moving average.

Gold [$902.00]: A sharp two week rally from annual lows of $740. After a 9 month decline, index is attempting to trade in a consolidating range.

US 10 Year Yield [3.85%]: Similar to Gold, an accelerated upside move in past few trading days. Trading in a multi-month range between 3.60%-4.00%.

US Dollar DXY [76.95] Following a summer rally, index is consolidated from overbought levels. Staying above it's 50 day moving average of 76.23.

S&P 500 [1213.17] Oversold in the near-term after testing July 15^th lows of 1200. Next key resistance stands at 1300.

Themes & Ideas:

Larger Cap companies offering attractive entry point.

Consumer Related: WMT (Wal-Mart), HSY (Hershey), LUV (Southwest Airlines), and SBUX (Starbucks),

Innovative and neglected groups that present longer-term upside.

Technology/Media: GMKT (GMarket Inc), SAP (SAP AG) and INTU (Intuit).

Healthcare: BLUD (Immucor), GENZ (Genzyme) and ILMN (Illumina Inc), and TECH (Techne)

WTR (Aqua America): Attractive on a relative basis. A leading water utilities provider with solid fundamentals. Favorable entry point at current trading range between $15-17.

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any way, considered liable for the futurinvestment performance of any securities or strategies discussed.

Market Update - September 22, 2008

Weekly Results:

S&P 500 1,255.08 +.27% 
NASDAQ 2,273.90 +.56% 
Russell 2000 753.74 +4.65%
MSCI Emerging Markets 36.29 +.52%                                                                                                                                                                                                         

A memorable and historic week!  In an election year, investors react to temporary policies while digesting intense headlines. Since last Sunday, anxiety increased for banks, regulators and money managers. At times, traditional risk assessment were being challenged. Especially, with interventions playing a greater force. Clearly, macro indicators reached significant multi-year ranges. For example, flight to safety and spike in volatility reached extreme levels. For optimists, these events can set the stage for a turnaround. As for the sustainability, it appears too early to call. In fact, confidence restoration might have led to more confusion. For the most part, "panic" was the dominant theme. Some characteristics of last week were a reminder of previous market crisis.

Importantly, the old adage "Don't fight the Fed" holds true. Friday's relief announcement sparked a sharp rally. Of course, most trading disciplines seemed not applicable given these violent swings. Nonetheless, effective money management requires one to adapt to changing landscape. The challenge ahead is not to overreact and overtrade in this unclear regulatory and market environment. Perhaps, this is another inflection point in global markets. This year, we've witnessed a series of events pertaining to cycle tops. 

In taking a step back, there are few things to consider in these times. The financial meltdown in this capacity was unprecedented. Nonetheless, from an investor's view, hints of a cycle peak were mildly visible from various angles. Leading up to this decline, homebuilders peaked in 2005. Hard assets (Gold/Crude) soared most of this decade while "paper assets" were out of favor. Credit concerns and weakening economy have been a reality for the past year and a half. In March, the Bear Sterns failure sent alarms with lingering effect. This Summer lows were not enough to create a market bottom. At the same time, mid week sentiment and panic selling further decelerated an oversold market. Therefore, interventions have contributed to short-term recoveries. This time, the compounding effects resulted in a reaction of higher magnitude.

Looking Ahead:

As the dust clears, there are cycle/sector themes are poised to reestablish. Interestingly, despite wild swings, weekly results don't reflect impact of recent events. For example, S&P +0.27%, Nasdaq 0.56%  and CRB (Commodity Index) -.12%. 

From a regulatory perspective there are lots of moving parts. This includes weekends approval of Goldman and Morgan Stanley becoming bank holding companies. Most portfolios look to readjust to liquidity injections by Federal Reserve. Indexes tracking US financials have seen major changes in the past few weeks (Ie. AIG, Merrill, Lehman, Fannie and Freddie).Chart readers can observe that BKX (Bank Index) is showcasing a bottoming recovery since July 15. In fact, a stunning 79% gain for the index since the summer lows. Therefore, those reassessing risk and tracking relative strength can view this as a recovering signal. Similarly, (RLX) Retail index is up over 25% since July 15. Next few weeks, will showcase if positive sentiment continues to unfold.

 

Stock Specific Ideas:

Consumer related Long:

HSY (Hersheys), LUV (Southwest Airlines), WMT (Wal-Mart) and SBUX (Starbucks).

Healthcare Long:

BLUD (Immucor), GENZ (Genzyme) and ILMN (Illumina Inc), and TECH (Techne)

MACRO LEVELS :

Crude [104.55]:  Sharp recovery from annual lows of $90.80.  Next resistance level at 200 day near $111 as it remains oversold in the near-term.

Gold [869]: Intermediate-term downtrend intact despite a two week rise. Attempting to stabilize around $850-900.

US 10 Year Yield [3.81] : Up 9 basis points last week. Trading at a lower end of a multi-year range. In the near term, 200 day avg is the same as Friday's close.

US Dollar DXY [77.68]: Retracing from yearly highs of 80.25. Overbought in the near-term with next major support at 76.

S&P 500 [1255.08] Attempting to stabilize around 1250. Holding above extreme lows of 1133 (Sep 18) and July 15th lowest point of 1200.

 

Dear Readers:

The positions and strategies discussed on MarketTakers are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any way, considered liable for the future investment performance of any securities or strategies discussed.

Market Thoughts: 9/15/2008

Weekly Results:

S&P 500 1,251 .70 +.76%
NASDAQ 2,261.27 +.24%
Russell 2000 720.26 +.20%
MSCI Emerging Markets 36.10 -2.09%

A chaotic and confusing week with key shifts in Macro dynamics. There were growing anxiety and major headline announcements over the weekend. Lehman's bankruptcy, Bank of America's acquisition of Merrill Lynch and liquidity expansion by the Federal Reserve. Now, participants have to manage their expectations before placing bigger bets.

Key questions to reexamine:

· Do themes in Commodity and Emerging Markets recover from multi-month downtrends?

· As Credit risk continues to persist; are recent interventions enough to spark a short-term rally?

· Are US Treasury yields headed lower?

· Is the US dollar overbought and fundamentally poised to go lower?

Investors are forced to digest a new playing field and risk assessment. Clearly, these dynamics contribute to volatility, irrational behavior, political discussions, and interventions. Putting these various pieces together partially explains the uncertainty in the marketplace. Since August 22^nd, Volatility index has risen nearly 40%. The last few weeks have demonstrated the difficulty of navigating through a turbulent markets. Overall sentiment reflects fear with increasing speculations. For the week ahead, there is further suspense given upcoming FOMC meeting, key earning announcements and option expirations.

For chart pattern observers, recent market lows have coincided with policy-makers' actions. Since the start of the credit crisis in 2007 there are five key bottoms within the current downtrend. These dates include Aug 2007, Nov 2007, March 2008, Jan 2008, and Jul 2008. In all these cases, a stock market rebound was fueled by cuts in the discount and fed funds rate, changes to lending system or bailouts. As for last week's rescue of Fannie/Freddie the answer remains to be seen. That said, odds for a recovery appear feasible in the near-term as markets are deeply oversold. Again, confidence restoration does take time and policymakers are using various tools.

Commodities/Emerging Markets:

Trend followers would argue the cycle reached an extreme. Interestingly, with lower commodity prices overall inflation worries are less of a concern than previous months.

Crude [101.18]: Nearing a psychological support level of $100. Oversold in the near-term with 200 day average at $111.64.

Gold [750.25]: Retracing back to October 2007 levels. Attempting to stabilize after a 6 month decline from March 2008 highs. Long-term uptrend is intact despite this steep correction. Mean-reversion and a short-term bounce appears feasible.

EEM [36.54]: Nearly a 40 % decline since October 2007 highs of $55.88. Major support around $35 level, where bullish conviction will be retested.

Rates/ Currency:

Observers and industry pundits are noticing the Dollar dig itself out a multi-year decline. Key participants are taking notes of recent moves. Now, if this recovery persists, money managers should look to readjust themes in portfolio holdings. On the other hand, credit concerns and overbought technicals can lead to short-term decline in US dollar.

US 10 Year Yield: [3.71%] Currently yields remain above annual lows of 3.28%. Sharp declines since October 2007. Further evidence needed for stabilization.

DXY (US Dollar): [78.96] A sharp recovery since March, resulting in overbought levels above $80. A weak finish last Friday as worries of financial weakness take hold. One can expect near-term corrections given overall uncertainty.

Financials:

In this environment, safety appears to be a precious commodity. This can result in a continuing "wait and see" game . For those looking ahead, there are bargains in US equities. The headline concerns over Lehman and AIG escalate Fear to a new level following Fannie / Freddie takeover. For those seeking positive signals, the HGX (Housing Index) is up significantly since July 15^th lows. Same argument is made for BKX (Bank Index) where it remains above annual lows. Nonetheless, a fundamental turnaround in banking and real estate groups requires some patience.

Money Management:

Its apparent in the past year that risk-aversion is a dominate global theme. Investors have flocked back to developed markets and value players are awaiting favorable entry points. Now, shorts will look to hedge as volatility increases yet again. Risk in Equity markets is too unclear. Nonetheless, a recovery in pending months presents few stock specific opportunities.

Consumer related Long;

HSY (Hersheys), LUV (Southwest Airlines), WMT (Wal-Mart) and SBUX (Starbucks).

Media/Tech:

DTV (Direct TV), and PMTC (Parametric Tech).
Healthcare Long:

BLUD (Immucor), GENZ (Genzyme) and ILMN (Illumina Inc), JNJ (Johnson & Johnson) and TECH (Techne).

Commodity Related Short :

TS (Tenaris SA, SID (Companhia Siderurgica Nacional ADR) and GGB (Gerdau S.A)

Market Update – September 8, 2008

Weekly Results:

S&P 500 1,242.31 -4.48%
NASDAQ 2,255.88 -6.46%
Russell 2000 718.85 -3.87%
MSCI Emerging Markets 36.86 -8.22%

Again, recurring themes continue to resurface in a slowing global economy. Actionable ideas have mostly paid off in betting against commodities related groups and emerging markets. Similarly, fundamental erosion in credit markets reconfirm an established downtrend.

A challenging holiday shortened week in which bulls lost confidence and volatility climbed higher. Last week played an important role in macro indicators as Crude fell 7%, Emerging Markets(EEM) declined 8%, and S&P 500 barely held above July 15th lows of 1200. In addition, VIX (Volatility Index) rose 18% to 23.06.

In looking ahead, participants await reactions to this weekends announcement. The takeover of Freddie/Fannie by the Federal Government reflects the credit cycle and role of intervention. Now, given ongoing anxiety in Financial Markets, additional headlines contribute to further uncertainly. In the days ahead, investor reaction (overreaction) will be highly monitored as we enter a weak seasonal period and upcoming elections.

Managing Ideas/ Trades

As the S&P 500 remains 9% removed from its 200 day moving average, one can expect a near-term bounces. In addition, last weeks heavy selling is poised for mean reversion. Nonetheless, a bottoming confirmation is not clear. Investors must distinguish near-term noise versus established downtrends.

Since March 2008, Bear Sterns collapsed, Gold prices peaked and US dollar began its recovery. In that period, European banks have sold off aggressively along with other emerging markets. That said, US is becoming attractive on a relative basis especially for companies with revenues mostly in US markets.

"S&P 500 stocks with no overseas exposure (148 stocks) are up an average of 20%, while those with more than 50% (106 stocks) are up 2.84%. The S&P 500 as a whole is up 4.94%. If the dollar continues to rally, this trend should stay in place."

Bespoke, September 3, 2008

Healthcare Long:

BLUD (Immucor), GENZ (Genzyme) and ILMN (Illumina Inc), JNJ (Johnson & Johnson) and TECH (Techne).

Other Long Ideas:

LUV (Southwest Airlines) , WMT (Wal-Mart), and PMTC (Parametric Tech).

Commodity Related Short :

TS (Tenaris SA): STLD (Steel Dynamics), SID (Companhia Siderurgica Nacional ADR) and GGB (Gerdau S.A)

Financial Short :

HCBK (Hudson City Bankcorp), AIB (Allied Irish Bank), STD (Banco Santander SA) and FED (First Federal).

Key Macro Levels:

Crude [106.23]: Broke below two key levels. First, the commodity is trading below its 200 day moving average. Secondly, prices failed to stay above $110 as the next major level stands at $100.

Gold [ 808.50] : Remains in a downtrend after peaking in March at $1011 and failing to recover above $880 level. In the near term, oversold after reaching annual lows of $786.

US 10 Year Yield [3.69%]: Yields continue to decline from June 13^th peak of 4.27%. Attempting to stabilize near 3.60%. Perhaps, decline in yields showcase risk aversion in global participants.

DXY – US Dollar [78.93] An explosive run as the index is up near 10 % since March lows. Next resistance around $80 and overbought in the near-term.